Forms of business Organisation

FORMS OF BUSINESS ORGANISATION

·         Introduction:

Decision relating to the form of organization plays an important role if one has to start a business. The forms of organization are  (i) Sole proprietorship  (ii) Partnership
(iii)Joint Hindu Family business.  (iv) Co-operative society

          (v) Joint Stock Company.

·         Important Concept

·         Meaning of Sole Proprietorship: It refers to a form of business organization which is owned, managed and controlled by an individual who is in receipt of all profits and bearer of all risks.

Features:

Single ownership :- It is wholly owned by one individual.

Control :- Sole proprietor has full power of decision making.

No Separate Legal Entity :- Legally there is no difference between business and businessman.

Unlimited Liability :- The liability of owner is unlimited. In case the assets of business are not sufficient to meet its debts, the personal property of owner can be used for paying debts.

No legal formalities :- are required to start, manage and dissolve such business organisation.

Sole risk bearer and profit recipient: - He bears the complete risk and there is nobody to share profit / loss with him.

Merits:

Easy to start and close :- It can be easily started and closed without any legal formalities.

Quick decision making :- as sole trader is not required to consult or inform anybody about his decisions.

Secrecy :- He is not expected to share his business decisions and secrets with anybody.

Direct incentive :- Direct relationship between efforts & reward provide incentive to the sole trader to work hard.

Personal touch :- The sole trader can maintain personal contacts with his customers and employees.

Social Utility :- It provides employment to persons with limited money who are not interested to work under others. It prevents concentration of wealth in few hands.

Demerits:

Limited financial resources :- funds are limited to the owner s personal savings and his borrowning capacity.

Limited Managerial ability :- Sole trader cann t be good in all aspects of business and he cann t afford to employ experts also.

Unlimited liability :- of sole trader compels him to avoid risky and bold business decisions.

Uncertain life :- Death, insolvency, lunacy or illness of a proprietor affects the business and can lead to its closure.

Limited scope for expansion :- Due to limited capital and managerial skills, it cannot expand to a large scale.

           

·         Meaning of Joint Hindu Family Business:

It is owned by the members of undivided joint Hindu family and managed by the eldest member of the family known as KARTA. It is governed by the provisions of Hindu law. The basis of membership is birth in a particular family.Karta eldest member of the family controls the business.

Features:

.

Formation - for a joint hindu family business there should be atleast two members in the family and some ancestral property to be inherited by them.

Membership - is by virtue of birth in the family.

Control - In it, control lies with eldest member of family known as Karta . All other members can give only advice.

Liability - of Karta is unlimited but of all other members is limited to the extent of their share in property.

Continuity - The business is not affected by death or incapacity of Karta as in such cases the next senior male member becomes the Karta.

Minor members - A minor can also become full fledged member of Family business

Merits:

Effective control - The Karta can promptly take decisions as he has the absolute decision making power.

Continued business existence - The death, Lunacy of Karta will not affect the business as next eldest member will then take up the position.

Limited liability - The liability of all members except Karta is limited. It gives them a relief.

Secrecy - Complete secrecy regarding business decisions can be maintained by Karta.

Loyality and co-operation - It helps in securing better co-operation and greater loyality from all the members who run the business.

Demerits:

Limited capital - There is shortage of capital as it is limited to the ancestral property.

Unlimited liability of Karta - It make him less enterprising.

Dominance of Karta - Karta manages the business and sometimes he ignores the valueable advice of other members. This may cause conflict among members and may even lead to break down of the family unit.

Hasty decisions - As Karta is overburdened with work. So sometimes he takes hasty and unbalanced decisions.

Limited managerial skills of Karta also poses a serious problem. The joint Hindu family business is on decline because of the diminishing no. of Joint Hindu families in the country.

·         Meaning of Partnership: Relation between persons to share the profits of the business carried on by all the partners or any one of the partner acting on behalf of all the other partners

Features:

Two or more persons - There must be atleast two persons to form a partnership. The maximum no. of persons is 10 in banking business and 20 in non banking business.

Agreement - It is an outcome of an agreement among partners which may be oral or in writing.

Lawful business - It can be formed only for the purpose of carrying on some lawful business.

Decision making & control - Every partner has a right to participate in management & decision making of the organisation.

Unlimited liability - Partners have unlimited liability.

Mutual Agency - Every partner is an implied agent of the other partners and of the firm. Every partner is liable for acts performed by other partners on behalf of the firm.

Lack of continuity - firms existence is affected by the death, Lunacy and insolvency of any of its partner. It suffers from lack of continuity

Merits:

Ease of formation & closure - It can be easily formed. Only an agreement among the partners is required.

Larger financial resources - There are more funds as capital is contributed by no. of partners.

Balanced Decisions - as decisions are taken jointly by partners after consulting each other.

Sharing of Risks - In it, risk get distributed among partners which reduces anxiety, burden and stress on individual partner.

Secrecy - Secrecy can be easily maintained about business affairs as they are not required to publish their accounts or to file any report to the govt.

Limitations:

Limited resources - There is a restriction on the number of partners and hence capital contributed by them is also limited.

Unlimited liability- The liability of partners is unlimited and they are liable individually as well as jointly. It may prove to be a big drawback for those partners who have greater personal wealth. They will have to repay the entire debt in case the other partners are unable to do so.

Lack of continuity - Partnership comes to an end with the death, retirement, insolvency or lunacy of any of its partner.

Lack of public confidence - Partnership firms are not required to publish their reports and accounts. Thus they lack public confidence.

Types

General / Active Parter - Such a partner takes active part in the management of the firm.

Sleeping or Dormant Partner - He does not take active part in the management of the firm. Though he invest money, shares profit & Loss, has

unlimited liability.

Secret Partner - He participates in business secretly without disclosing his association with the firm to general public. His liability is also unlimited.

Nominal Partner - Such a partner only gives his name and goodwill to the firm. He neither invests money nor takes profit. But his liability is unlimited.

Partner by Estoppel - He is the one who by his words or conduct gives impression to the outside world that he is a partners of the firm whereas actually he is not. His liability is unlimited towards the third party who has entered into dealing with firm on the basis of his pretention.

Partner by holding out - He is the one who is falsely declared partner of the firm wheras actually he is not. And even after becoming aware of it, he does not deny it. His liability is unlimited towards the party who has deal with firm on the basis of this declaration.

Kinds of partnership:

(i) At Interest (ii) Formed for completing a work

Partnership deed: It contains the rules and regulations for carrying on partnership.

CO-OPERATIVE SOCIETY

A cooperative society is a voluntary association of persons of moderate means, who unite together to protect and promote their common economic interests.

FEATURES

Voluntary association - Everyone having a common interest is free to join a cooperate society and can also leave the society after giving proper notice.

Legal status - Its registration is compulsary and it gives it a separate legal identity.

Limited liability - The liabity of the member is limited to the extend of their capital contribution in the society.

Democratic control - Management and control lies with the managing committee elected by the members by giving vote. Every member has one vote irrespective of the number of shares held by him.

Service motive - The main aim is to serve its members and not to maximise the profit.

State control - They have to abide by the rules and regulation framed by govt. for them.

Distribution of surplus - The profit is distributed on the basis of volume of business transacted by a member and not on the basis of capital contribution of member.

MERITS

1.          Ease of formation - It can be started with minimum of 10 members. Registration is also easy as it requires very few legal formalities.

2.          Limited liability :- The liability of members is limited to the extend of their capital contribution.

3.          Stable Existence - Due to registration it is a separete legal entity and is not affected by the death, Lunacy or insolvency of any of its member.

4.          Economy in operations - Due to elimination of middleman and voluntary services provided by its members.

5.          Government Support - Govt. provides support by giving loans at lower interest rates, subsidies & by charging less taxes.

6.          Social utility :- It promotes personal liberty, social justice and mutual cooperation. They help to prevent concentration of economic power in few hands.

LIMITATIONS

1.          Shortage of capital - It suffers from shortage of capital as it is usually formed by people with limited means.

2.          Inefficient management - Co-operative society is managed by elected members who may not be competent and experienced. Moreover it cann t afford to employ expert and experienced people at high salaries.

3.          Lack of motivation - Members are not inclined to put their best efforts as there is no direct link between efforts and reward.

4.          Lack of Secrecy - Its affairs are openly discussed in its meeting which makes it difficult to maintain secrecy.

5.          Excesive govt. control - it suffers from excessive rules and regulations of the govt. It has to get its accounts audited by the auditor and has to submit a copy of its accounts to registrar.

6.          Conflict among members - The members are from different sections of society with different view points. Sometimes when some members become rigid, the result is conflict.

TYPES OF CO-OPERATIVE SOCIETIES

1.          Consumers co-operative Society - It seeks to eliminate middleman by establishing a direct link with the producers. It purchases goods of daily consumption directly from manufacturer or wholesalers and sells them to the members at reasonable prices.

3.          Producer s Co-operative Society - The main aim is to help small producers who cannot easily collect various items of production and face some problem in marketing. These societies purchase raw materials, tools, equipments and other items in large quantity and provide these things to their members at reasonable price

4. Marketing Co-operative Society - It performs various marketing function such as transportation, warehousing, packing, grading, marketing research etc. for the benefit of its members. The production of different members is pooled together and sold by society at good price.

5. Farmer s Co-operative Society - In such societies, small farmers join together and pool their resources for cultivating their land collectively. Such societies provide better quality seeds, fertilisers, machinery and other modern techniques for use in the cultivation of crops. It provides them opportunity of cultivation on large scale.

6. Credit co-opearative Society - Such societies protect the members from exploitation by money lenders. They provide loans to their members at easy terms and reasonably low rate of interest.

7. Co-operative Housing Society - The main aim is to provide houses to people with limited means / income at reasonable price.

JOINT STOCK COMPANY

Meaning - Joint stock company is a voluntary association of persons having a separate legal existence, perpetual succession and common seal. Its capital is divided into transferable shares.

FEATURES

1.          Seperate Legal Existence - It is created by law and it is a distinct legal entity independent of its members. It can own property, enter into contracts, can file suits in its own name.

2.          Perpetual Existence - Death, insolvency and insanity or change of members has no effect on the life of a company It can come to an end only through the prescribed legal procedure.

3.          Limited Liability - The liability of every member is limited to the nominal value of the shares bought by him or to the amt. guaranted by him.

4.          Transferability of shares - Shares of public Co. are easily transferable. But there are certain restrictions on transfer of share of private Co.

5.          Common Seal - A company may or may not have a common seal. 

6.          Seperation of ownership and conrol - Management of company is in the hands of elected representatives of shareholders known individually as director and collectively as board of directors.

MERITS

1.          Limited Liability - Limited liability of shareholder reduces the degree of risk borne by him.

2.          Transfer of Interest - Easy transferability of shares increases the attractiveness of shares for investment.

3.          Perpetual Existence - Existence of a company is not affected by the death, insanity, Insolvency of member or change of membership. Company can be liquidated only as per the provisions of companies Act.

4.          Scope for expansion - A company can collect huge amount of capital from unlimited no. of members who are ready to invest because of limited liability, easy transferability and chances of high return.

5.          Professional management - A company can afford to employ highly qualified experts in different areas of business management.

LIMITATIONS

1.          Legal formalities - The procedure of formation of Co. is very long, time consuming, expensive and requires lot of legal formalities to be fulfilled.

2.          Lack of secrecy - It is very difficult to maintain secrecy in case of public company, as company is required to publish and file its annual accounts and reports.

3.          Lack of Motivation - Divorce between ownership and control and absence of a direct link between efforts and reward lead to lack of personal interest and incentive.

4.          Delay in decision making - Red tapism and bureaucracy do not permit quick decisions and prompt actions. There is little scope for personal initiative.

5.          Oligarchic management - Co. is said to be democratically managed but actually managed by few people i.e. board of directors. Sometimes they take decisions keeping in mind their personal interests and benefit, ignoring the interests of shareholders and Co.

Types of Companies:

(i) Private company (ii) Public company.

Choice of form of Business organization: (i) less costly in setting up the organization

(ii) Limited liability (iii) continuous existence (iv) Form of raising capital (v) Control to be made (vi) Nature of business.

Formation of a Company

STAGES

Promotion: Functions of a Promoter:

(i)    Finding out a business opportunity (ii) Conducting studies (iii) Getting the name approved. (iv) Fixing up persons to sign Memorandum of association

(v)  Appointment of professionals.(vii) preparation of necessary documents.

Documents: Memorandum of association:

(i) Name clause (ii) Registered office clause (iii) Objects clause (iv) Liability clause (v)Capital clause (vi) Association clause. (vii) Articles of association. (viii) Consent of directors (ix) Agreement with managing director or whole time director (x) Statutory declaration

Incorporation: The memorandum of association must be duly stamped, signed and witnessed. (ii) The articles of association duly stamped and witnessed. (iii)Written permission of the directors. (iv) Agreement with the managing director/manager.(v)A copy of the registrar’s letter giving permission for the name. (vi) A declaration that all the legal requirements are followed.(vii) A notice about the exact office of the registered office. (viii) Documents showing the payment of fees.

Capital subscription:

(i) SEBI approval (ii) Filing of prospectus. (iii) Appointment of brokers, bankers etc., (iv) Collection of minimum subscription (v) Application to stock exchange (vi) Allotment of shares.

·         Commencement of Business:

(i)    A declaration about meeting minimum subscription requirement. (ii) A declaration

regarding the application and allotment money paid by the directors as same as others. (iii) A declaration that no money is payable to the applicants because of the failure of the company. (iv) A statutory declaration that the above particulars are followed. (v) The registrar shall examine the documents if these are found satisfactory a certificate of commencement of business will be issued.

·  Very Short Answer type Questions:                                                     (1 Mark)

1.  Varun is the only owner of his restaurant. Name the form of business

organization.       Ans: Sole proprietorship.

2.  Name the form of organization found only in India           Ans: JHF

3.       Name any one business in which sole proprietorship is most suitable.

 Ans: Tailoring

4.       Name the type of partnership which is formed to accomplish a specific project for a specific time.

Ans: Particular partnership

5.       State any one consequence of non registration of a partnership firm. Ans: An unregistered firm cannot file a case against third parties.

6.       What is the minimum number of persons required to form a cooperative society?

Ans: Ten

7.       Name the type of company which can invite the public to subscribe for the shares or debentures.
      Ans: Public.

8.       Name the process by which a joint stock company is registered. 
      Ans: Incorporation.

9.   Name the document which defines the object and powers of the company. 
     Ans: Memorandum of Association.

·  Short Answer Type Questions:                                                  (3 or 4 Marks)

1.  State three advantages of joint Hindu Family business.

Ans (i) Effective control (ii) Continuity of business (iii) limited liability of members (iv) Increased loyalty. (any three)

2.       Explain the features of a Joint Hindu Family business. Ans: (i) Formation (ii) Liability (iii) Control

3.       List any three advantages of partnership.

Ans: (i) Easy to start and close (ii) proper decision making (iii) More money (iv) secrets are maintained.

4.       State the important features of partnership.

Ans: (i) Formation (ii) Liability (iii) Risk bearing (iv) decision making

(v)  continuity (vi) Member .

5.   What are the consequences of nonregistration of a partnership firm? Ans: A Partner of an unregistered firm cannot file a case against the firm or other partners.

The firm cannot file a case against third parties. The firm cannot file a case against the partners.

6.       Explain any three features of a company.

(i)  Artificial person (ii) Formation is difficult (iii) Company has separate Identity.

7.       Enumerate the various types of cooperative societies.

(i) Consumer (ii) Producer (iii) Marketing (iv) Farmer’s (v) Credit

(vi)  Cooperative housing societies

8.       What are the functions of a promoter?

(i)   Finding out a business opportunity (ii) Conducting studies (iii) Getting the name approved. (iv) Fixing up persons to sign Memorandum of Association. (v)Appointment of professionals.(vii) preparation of necessary Documents.

·  Long Answer Type Questions:                                                   (5 or 6 Marks)

1.  Distinguish between Memorandum of Association and Articles of Association.

Answer :

Memorandum of Association

1.        It defines the objects for which the company is formed.

2.        This is the main document of the company.

3.        This defines the relationship of the company with outsiders.

4.        Every company has to file Memorandum Of Association.

5.        Alteration of Memorandum of Association is difficult.

Articles of Association

6.        It defines the objectives of the company that are to be achieved.

7.        This is the subsidiary document of the company.

8.        Articles define the relationship of the members and the company.

9.        It is not necessary for the public limited company.

10.    It can be altered by passing a special resolution.

2.       Distinguish between a private company and public company.

Basis	Public Company	Private company
Members	Minimum-7 Maximum-Unlimited	Minimum-2 Maximum-200
Minimum number of directors	Three	Two
Index of members	Compulsory	Not compulsory
Transfer of shares	No restriction	Restriction on transfer
Invitation to public to subscribe to shares	Can invite the public to subscribe to its shares or debentures	Cannot invite the public to subscribe to its securities

3.  Describe the various partners in a partnership firm.

Answer :

TYPES OF PARTNERS

Active partner: An active partner is a partner who gives capital, participates in management, shares the profits and losses and has unlimited liability.

Sleeping partner: A Partner who do not take part in the business activities. Secret partner: A partner who has association with the firm but unknown to the

public.

Nominal partner: A partner who allows his name to be used by the firm

Partner by estoppel: A person who by behaviour sets an impression to others that he/she is a partner of the firm.

Partner by holding out: A person who is not a partner but allows himself to be represented as partner in a firm.

4.       Why is company form of organization preferred than other forms of organization?

Answer :

Merits: (i) Liability is limited (ii) Chances are there for expansion

iii) Managed by professional people (iv) Continuous existence (v) Shares can be easily transferred from one person to another person.

5.   List and explain the factors which help in choosing an appropriate form of Organization.

Answer :

Choice of form of Business organization: (i) less costly in setting up the Organization.(ii) Limited liability (iii) continuous existence (iv) Form of raising capital (v) Control to be made (vi) Nature of business.

Hots

1. “One man control is the best in the world if that man is big enough to manage everything”. Explain.

Answer :

Merits of sole proprietorship:

1.  A sole proprietor can take decision quickly.

2.  Information can be kept secretly without any leakage.

3.  No need to share profits.

4.  He gets self satisfaction for the work he has done.

5.  Easy to start and to close because of less rules and regulations.

2.    “A private company avoids many of the defects of a public company”. Explain.

Answer :

Merits: (i) Liability is limited (ii) Chances are there for expansion

(iii) Managed by professional people (iv) Continuous existence (v) Shares can be easily transferred from one person to another person.

3.    State the reasons for issuing prospectus:

Answer :

1.       It serves as an invitation to the public to invest in the shares and debentures of the company.

2.       It acts as an advertisement for inducing the investors to invest in the company.

3.       It serves as an record of the terms and conditions on which shares and debentures are issued.

4.       It helps to protect the interest of the investors.

4.       “A company is said to be an artificial person created by law, having a separate entity with perpetual succession and a common seal”. Discuss the above statement.

Answer :

Features: (i) Artificial person (ii) Formation is difficult (iii)Company has separate identity.(iv)Continuous existence (v) Control of the company is made by directors.(vi)liability is limited.(vii) Common seal.

5.    Describe the steps involved in the floatation of the company.

Answer :

Capital subscription:

1.  SEBI Approval.

2.  Filing of prospectus.

3.  Appointment of bankers, brokers and underwriters.

4.  Minimum subscription.

5.  Application of stock exchange.

6.  Allotment of shares.